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IAI Actuarial Core Principles · Business Economics · Importance of international trade

A small open economy imports steel at a world price below its pre-trade domestic price. Using a standard partial-equilibrium analysis of free trade without any tariff, which outcome is correct?

Consumers gain more surplus than domestic producers lose, giving a net gain to the economy. The lower world price raises consumption and consumer surplus, while domestic producers lose surplus as output falls. The difference is the net welfare gain from importing at the cheaper world price.

  1. ADomestic producers gain surplus and consumers lose surplus, with a net loss to the economy
  2. BConsumers gain more surplus than domestic producers lose, so there is a net gain to the economyCorrect
  3. CBoth consumers and domestic producers gain surplus
  4. DConsumer surplus is unchanged because quantity demanded stays the same
  5. Domestic producers gain and the government gains tariff revenue, so the economy gains overall

Explanation

A lower price lifts consumer surplus and quantity consumed, while domestic producers sell less at a lower price and lose surplus. The consumer gain exceeds the producer loss, leaving a net welfare gain. Option 0 describes the opposite result.

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